Posted: February 10th, 2015

Accounting

Paper, Order, or Assignment Requirements

ACCT 3110

INTERMEDIATE ACCOUNTING I

Homework 5

(max 10 points)

Due Date: November 24, 2014

The purpose of this exercise is to (i) introduce you to real world examples of how companies

estimate their bad debt expense and (ii) familiarize you with the complexity of accounting for

notes receivables.

QUESTION 1

Access EDGAR (http://www.sec.gov/edgar/searchedgar/companysearch.html). Retrieve the 10-K

of Target Corporation for the fiscal year ended January 28, 2012.

(a) How does Target estimate bad debt expense on credit card receivables? What does Target

do to monitor the credit quality of its credit card receivables?

(b) What is Target’s policy regarding writing off credit card receivables?

QUESTION 2

On January 1, 2012, Seven Dwarfs Inc sold coal to Prince Charming Co for $500,000 and

received $100,000 in cash and a three-year, 5% note for the balance. The prevailing market

interest rate on notes of similar risk and maturity is 6%. The note requires interest payment at the

end of each of the three years. The coal cost Seven Dwarfs $250,000. Seven Dwarfs uses the

effective interest rate method to amortize premium or discount on notes receivable.

(a) Prepare the journal entry to record the sale of coal for Seven Drawfs.

(b) Prepare an amortization table to show the premium or discount balance on and the

carrying value of the note receivable at the end of 2012, 2013, and 2014.

(c) Prepare the necessary journal entries for Seven Dwarfs for the years ended December 31,

2012, 2013, and 2014.QUESTION 3

On December 31, 2013, Rose Kim Co performed IT consulting services for Tee Wang Co. Tee

Wang was short of cash and Rose Kim agreed to accept a $80,000, non-interest bearing note due

December 31, 2015 as payment in full. Tee Wang is somewhat of a credit risk and typically

borrows funds at a rate of 10%. Rose Kim is much more creditworthy and has various lines of

credit at 6%.

(a) Obtain the relevant authoritative literature on the appropriate interest rate to use in the

above scenario from the Accounting Standards Codification. Determine the appropriate

interest rate to use.

(b) Prepare the journal entry to record the transaction on December 31, 2013 for Rose Kim.

(c) Assume the fiscal year end of Rose Kim is December 31. Prepare the necessary journal

entries for Rose Kim for the years ended December 31, 2013 and 2014.